Cryptocurrencies are digital currencies that are mostly registered in Distributed Ledger Technology. The world of cryptocurrencies in Cyprus is not a new phenomenon. The possibilities provided by “peer-to-peer” networks through blockchain technology, as well as the broader idea of conducting commercial transactions on the basis of a fully decentralized database, without interference from banking institutions or governments, has attracted attention. . The crypto-assets are controlled exclusively by their owners, who are given the opportunity to save them, to invest them, to exchange them and / or to make direct payments for the purchase of goods and / or services. In view of the intense and widespread use of cryptocurrencies in Cyprus, the need for relevant legislation is obvious.
The importance of legislation for services
Due to the decentralized nature of cryptocurrencies, it could easily be used as a means of conducting illegal transactions and smuggling. In addition, the fact that it is controlled exclusively by its users has the effect of becoming a sensitive and volatile currency compared to traditional forms of currency. Therefore, any regulations in the operating regulations of companies wishing to provide cryptocurrency supply and trading services as well as regulations in the operating regulations of the specific currency are not only welcome but also necessary to ensure the reliability of the specific currency, to maintain public confidence in cryptocurrencies but also for the protection of consumers, users and investors who trade with them.
Legislative initiatives
The need for legislation of this technology had been reflected in previous discussions between the former Speaker of Parliament and the Minister of Finance, while for the first time in 2018 the Council of Ministers decided to set up an Ad Hoc Working Group for the development of Blockchain technology in Cyprus, whose mission is to study possible applications of Blockchain technology in the public sector '. Speaking about blockchain technology, the former Speaker of Parliament stated that “it can offer transparency, security and productivity in business processes, while at the same time it will offer space for development of new companies, adapted to the new market and technology. In addition, the sequence of specific standardization parameters, in combination with the application of blockchain technology can help in the development of interoperability, while pushing towards innovation, productivity, but especially, towards the creation of new opportunities and jobs “. Unfortunately, the above-mentioned initiative did not result in the promotion and implementation of a specific national strategy, but the strong need for legislation is underlined.
The result of the recognition of the constant need for legislative regulation was the preparation of the bill ' The law on distributed accounting technology of 2021' which, among other things, regulates issues such as definitions for Distributed Universal Technology, the legal status of smart contracts, the status of cryptocurrencies as assets and the further delegation of supervisory powers and responsibilities to the Cyprus Securities and Exchange Commission. This bill is in public consultation and we hope for the soon taking of legislative measures that will provide legal security to the public and the various affected companies.
The competent authority
Competent authority is the Cyprus Securities and Exchange Commission (CCP) which is an independent supervisory authority responsible for the supervision of investments, services and securities transactions in the Republic of Cyprus as well as the collective investment and asset management sector. It is also responsible for licensing business entities that want to operate in the field of cryptocurrencies. In June 2021, the ECC, as an anti-money laundering and anti-terrorism financing (AML / CFT) body and overseer of cryptocurrency transactions in or out of Cyprus, presented the Register of Providers of Cryptographic Information Providers and the conditions of their operation, registration and supervision.
What are the obligations of the entities that want to operate as Providers of Cryptographic Data Services?
Under the Law on the Prevention and Suppression of Money Laundering and the Financing of Terrorism of 2007 (AML Law), providers providing their services within or outside Cyprus must qualify as obligated entities within the meaning of of the Anti-License Act and are therefore subject to all AML / CFT obligations. AML provides that providers must be registered with the ECC, other than entities established in another Member State and registered with a national competent authority of the EEA, under the relevant national law transposing the 5th European Anti-Doping Directive money laundering.
Which companies or services are considered Providers of Cryptographic Data Services?
Under this law, a Cryptographic Data Service Provider is any business entity and / or any natural person that exchanges cryptocurrencies and fiat currencies, exchanges cryptocurrencies, manages, transfers, holds and / or stores, including keys or means enabling the exercise of control over cryptographic assets, offering and / or selling crypto-assets, including the initial offering of participation and / or provision of financial services related to the distribution, offering and / or sale of cryptocurrencies.
Therefore, companies and / or service providers active in connection with the above must be formally registered with the ECC in order to be able to provide such encryption exchange services within a regulatory framework. A provider and / or a company legally registered in another Member State of the European Economic Area (EEA) intending to operate in Cyprus and / or provide services to Cypriot citizens must notify the ECC of the necessary certificates and / or proof. Where these services or activities are not covered by the AML / CFT registration framework, the provider should apply for registration as a Cryptographic Data Service Provider at EKK.
What regulates the existing legal framework and the minimum initial capital that must be invested?
The existing legal framework regulates, inter alia, the suitability and well-being of the Cryptographic Data Service Providers and the persons holding a Management position, the conditions in relation to the registration as a Cryptographic Data Service Provider, the organizational and operational requirements, the preparation of Know Your Client ( ) and other due diligence measures. It also regulates the planning of the financial profile of the clients, the determination of the source of the clients' funds, the monitoring of the clients' transactions and the identification and reporting of suspicious transactions, the undertaking of a comprehensive risk assessment in relation to the clients' activities and the measures taken customer, activity and crypto asset.
The minimum initial capital required ranges between € 50,000- € 150,000 depending on the class of the provider judged based on the activities it intends to undertake. Regardless of the size of the proposed transaction the KYC must be done.
Is the introduction of new legislation in this area expected?
In September 2020, the European Commission approved an extensive new Digital Financing Package aimed at transforming the European economy over the coming decades, for cryptocurrency markets. The European Union proposal to harmonize the European framework for issuing and trading different types of cryptocurrencies is called MiCAR and focuses on rules for regulating types of encrypted assets outside the scope, such as stablecoins underlying external asset), as well as legislation for cryptocurrency service providers.
In particular, stablecoin issuers and Cryptographic Data Service Providers whose market volumes significantly exceed the thresholds will be subject to obligations such as maintaining a white paper and exercising due diligence.
With its introduction, MiCAR will be applied in all Member States of the European Union in the form of a regulation in all Member States, without the need for application in national law. It proposes a legal framework for assets, markets and service providers that are not currently regulated at European level and enables the provision of licensed services across the EU. We will be able to have a more complete and clear picture of this innovative legal framework. with its application.
At the national level, the Minister of Finance published in December 2021 a formal risk assessment for the Republic of Cyprus regarding the risks of money laundering related to fictitious assets and fictitious asset service providers (VASPs).
The Minister's suggestions as a consequence of the aforementioned study are the undertaking and implementation of written tactics by companies in compliance with the rules of bank transfer of virtual currencies as well as the retention of data related to specific virtual currencies by the competent authorities. If an increase in the relevant activity is expected, the Ministry stressed the importance of timely risk identification and cooperation with other competent authorities at international level to identify best practices. In addition, initiatives taken by VET aim at the full harmonization of the European Regulations for the fight against money laundering under Cypriot law.
Finally, the European Law Enforcement Training Agency has selected Cyprus as a training center for law enforcement services in dealing with cryptocurrency-related crime.
As can be seen from the above, there are various ongoing projects and legislation aimed at the smooth conduct of business or other activities in the field of cryptocurrencies and related services, which we monitor with attention and impatience, hoping for their timely implementation. We truly believe that further legislation will give Cyprus a real lead in becoming an international business center for the aforementioned activities due to the legal security and certainty it will be able to offer to future investors and businesses.
Mary Christoforou
Junior Associate of the Insurance Law and Personal Injury Department of Harris Kyriakides
Tonis Kyriakidis
Trainee Associate of the Commercial, Real Estate and Employment Advisory and Commercial, Employment and Real Estate Litigation departments of Harris Kyriakides
